Last week, the Federal Reserve Bank of Dallas published a working paper entitled “Cryptocurrency Market Reactions to Regulatory News.” The 18-page report is an updated version of a paper by the same authors previously published by the Bank of International Settlements (BIS). It is co-authored by Raphael Auer, principal economist at the BIS, and Stijn Claessens, the BIS’ Head of Financial Stability Policy and Deputy Head of the Monetary and Economic Department.
The Federal Reserve Bank of Dallas has published a paper showing how cryptocurrency markets are affected by crypto regulatory actions. The research also determines whether the authorities have some scope to make cryptocurrency regulation effective.
The paper explores the effects of regulatory actions on cryptocurrency markets. The researchers found that the markets respond “most strongly to news events regarding the legal status of cryptocurrencies.” News of general bans on crypto use, whether cryptos are securities, whether they will not be treated as a currency, or strict AML/CFT measures have strong adverse impacts. News indicating possible legal frameworks for cryptocurrencies or initial coin offerings (ICOs) “coincides with strong market gains.”
How regulatory actions affect the price of bitcoin.
Some regulatory announcements, however, do not affect cryptocurrency markets. According to the study:
Authorities’ unspecific general warnings have no effect, nor does news regarding the likelihood of central bank digital currency (CBDC) issuance.
Research Suggests Room for Effective Regulation
For their paper, Auer and Claessens identified 151 regulatory news events, most of which were in China, India, Japan, the U.K., and the U.S. They assessed the intraday impact of these events on the price of bitcoin as well as the prices of other cryptocurrencies and other aspects of the crypto markets.
“Overall, our analysis suggests that, at the current juncture, there is scope to apply regulations,” they believe. “It also indicates that regulation need not be bad news for the markets, with price responses notably signaling a clear preference for a defined legal status, albeit a light regulatory regime.” The researchers concluded:
At the current juncture, authorities around the globe do have some scope to make regulation effective.
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